Semiconductors: Goodwill impairment testing

Our quantitative impairment assessment considers both the income approach and the market approach to estimate a reporting unit's fair value. The income approach estimates fair value using discounted future cash flows for a reporting unit primarily using the following major assumptions and inputs: revenue, based on assumed market segment growth rates and our assumed market segment share; estimated costs; and appropriate discount rates based on a reporting unit's weighted average cost of capital. Our quantitative impairment assessment is sensitive to changes in underlying estimates and assumptions, the most sensitive of which is the discount rate. The major inputs and assumptions used in estimating discounted cash flows are derived from historical data, various internal estimates and a variety of external sources, which are similar to those used in our business planning and forecasting processes. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available market data. Our estimates and assumptions are inherently uncertain and change over time based on operating results, market conditions and other factors and could materially affect the determination of the fair value and potential goodwill impairment for each reporting unit.

The market approach estimates fair value using financial multiples and transaction prices of comparable companies.

To corroborate our fair value conclusions, we combine the estimated fair values for all reporting units and perform a market capitalization reconciliation as of the goodwill assessment date to validate the reasonableness of the implied control premium relative to relevant market transactions in similar industries. For this reconciliation, we calculate market capitalization using both the spot stock price as of the assessment date as well as the average stock price over a reasonable period of time preceding the assessment date. If the reconciliation were to result in an unreasonable control premium, we would reassess the key inputs and assumptions underlying our valuation, which could result in the recognition of an impairment charge.